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Investors agree to transfer Sh22.5bn in bond switch deal
A swap bond occurs when holders of a paper that is nearing maturity are offered the exclusive chance to move all or part of their principal directly into another longer bond.
Investors have agreed to transfer Sh22.5 billion from maturing government securities into a longer-dated bond that falls due in 2029, giving the National Treasury relief from pressure to make the repayments.
The swap transaction, which is also known as a switch bond sale, was targeting Sh15 billion maturities from three Treasury bills that mature on September 7, 2026, and a 15-year bond that is due for repayment in September 2027.
Holders of these securities were offered the chance to transfer part of their principal into a 10-year paper that matures in November 2029, effectively stretching out their lending for another three years.
The August switch bond primarily targeted Treasury bills, which are due in a period of heavy maturities on short-term government debt after a spike in subscriptions over the last three months. The CBK did not, however, disclose the split in the proceeds between the T-bills and the 15-year bond.
When the swap sale was announced last month, the State faced pressure to repay Sh195.7 billion in 91-day Treasury bills that were issued since mid-May.
“The switch favours short-term investors who are seeking to roll over their current holdings and tap into a better return while at it,” said analysts at Sterling Capital in a note on the switch bond result.
“The 10-year bond (destination bond) has a gross coupon of 12.28 percent (net coupon of 11.05 percent), which is relatively attractive compared to the 15-year bond’s gross coupon of 11 percent (net coupon of 9.9 percent) as well as 8.56 percent, 7.82 percent and 9.58 percent weighted average rates for the 91-day, 182-day and 364-day T-bills respectively.”
A swap bond occurs when holders of a paper that is nearing maturity are offered the exclusive chance to move all or part of their principal directly into another longer bond.
Ordinary rollovers, on the other hand, see investors wait until they are paid back their principal by the CBK before making bids in the monthly bond sales where there is no guarantee that their offers will be accepted.
The August sale was the second one carried out in the current fiscal year, following July’s Sh8.2 billion swap between a five-year bond maturing in November 2026 and a 12-year paper maturing in November 2032.
The successive sales are part of the government’s new debt management strategy of issuing switch bonds every month, departing from the previous practice of utilising the window on a need basis, targeting specific bonds whose repayment would otherwise cause a strain on the exchequer.
For the fiscal year ended June 2026, the CBK offered four switch bonds executed between January and May 2026, which pushed forward maturities worth Sh66.8 billion that were due in the next two years. The year’s borrowing plan had called for six such bonds.
Investors participating in the swap auctions are usually offered bonds that pay a higher interest rate compared to what their current papers pay to entice them to agree to the transaction.
This rate incentive allows them to secure higher future interest returns, even when interest rates are trending downwards.
Switch bonds were only introduced into the Kenyan market recently, coinciding with the rise in government debt service costs amid higher borrowing needs to fund a widening budget deficit.
The Treasury brought its first such bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill. This netted Sh20.2 billion out of a target of Sh25.6 billion.
The second switch bond was sold in December 2022, seeking Sh87.8 billion via a six-year infrastructure bond, targeting holders of maturing Treasury bills worth Sh31.96 billion and a maturing two-year bond which had an outstanding amount of Sh55.85 billion.
